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Dodd-Frank and Subprime Auto Loan Market Print
Written by Dean Baker   
Monday, 21 July 2014 13:18

Four years out from the passage of Dodd-Frank it is pretty clear that the bill did not lead to an fundamental restructuring of our financial system, as many had hoped. The too-big-too-fail Wall Street banks are bigger than ever and operating pretty much as they always did. Many of the highest earners in the country are still traders, hedge fund, and private equity types who are quite adept at shuffling paper, even if it provides no service to the productive economy.

There is one important gain that can be identified from Dodd-Frank: the creation of the Consumer Financial Protection Bureau (CFPB). The importance of the CFPB was demonstrated clearly last weekend in a New York Times article on abuses in the subprime auto loan market.

The article documented practices that were reminiscent of the abuses of the housing bubble years. Lenders were filling in phony income numbers to allow borrowers to get loans for which they would not otherwise qualify. They would list higher interest rates and sometimes a higher loan amount that what had been agreed to with the borrower. They would also tack on fees and charges that had not been clearly disclosed. The result is that many borrowers end up losing their cars and also end up with a big strike on their credit record.  

These abuses testify to the importance of the CFPB because they are occurring in the one major area of consumer lending explicitly excluded from the CFPB. Auto loans were stripped out of the CFPB's jurisdiction by an amendment proposed by Representative John Campbell (R-CA), a former used car dealer. The amendment passed with several Democrats joining the Republicans to secure a majority. 

The striking part of this picture is that the abuses are occurring where the CFPB is not operating, as opposed to the sectors of the consumer market where it does have jurisdiction. This demonstrates both that the CFPB has been effective where it is allowed to operate and, that in the absence of a serious policing presence, the financial industry has not changed its behavior.

'Are We There Yet?' Moving Beyond the Recovery Question Print
Written by Ben Wolcott   
Monday, 21 July 2014 10:02

Jason Furman, who chairs the Council of Economic Advisers, spoke at Brookings on Thursday about the significant progress of the labor market since the Great Recession and the challenges ahead. While Chairman Furman spoke mostly about aggregate trends, he also highlighted specific groups that are struggling disproportionately in the recovery, such as young black males. In discussing the labor market, particularly unemployment rates, Furman repeatedly used the “Average in the Last Recovery” (which he defines as the average rates from December 2001 to December 2007) as a benchmark to judge the progress of the current recovery.



Labor Market Policy Research Reports, June 8 – July 17 Print
Written by Ben Wolcott   
Friday, 18 July 2014 09:58

The following reports on labor market policy were recently released:



Private Equity at Work: CalPERS Private Equity Returns: Good, But Not Good Enough Print
Written by Eileen Appelbaum   
Wednesday, 16 July 2014 13:39

As we noted in a recent post:

Private equity investors are flush with cash distributions. Now that money is finally rolling in, many seem blithely unaware that the typical PE fund launched since 2005 has failed to beat the stock market. Investors would have been better off putting their money in an index fund that tracked the market than in these PE funds – and would have had less risk and more liquidity to boot. Yet PE investors are ploughing cash back into new PE funds. According to private equity data research firm PitchBook, 2013 was the best year for private equity fundraising since the financial crisis struck in 2008, and the pace has continued into 2014.



Quick Thoughts on the New CBO Projections Print
Written by Dean Baker   
Tuesday, 15 July 2014 20:38

The deficit hawks will undoubtedly find much to hype in the latest long-term projections from the Congressional Budget Office (CBO). After all, they move forward by a year to 2030 the date of the Social Security trust fund's depletion. That should be worth a quick war dance down at the Peter G. Peterson Foundation, but there are a few items worth noting for more serious folks.

First, most of the projected rise in the annual deficit between 2014 and 2039, is due to an increase in the interest burden from 1.1 percent of GDP in 2014 to 4.7 percent of GDP in 2039. This increase is mostly due to the assumption that the average interest rate on government debt will rise since the debt to GDP ratio is projected to be just 40 percent higher in 2039 than it is today. The assumption of higher interest is at least peculiar in the slow growing economy projected by CBO. If interest rates remain closer to current levels, then the story of exploding deficits/debt largely vanishes.

The other point is that this is overwhelmingly a health care story. The figure below shows the projected levels of spending in 2014, 2024, and 2039. It also shows an alternative scenario for 2039 that assumes age adjusted spending on health care just grows at the same rate as GDP. A final scenario shows spending assuming that per capita health care spending falls to half of its projected level, bringing it in line with the average for other wealthy countries.

Book3 23404 image002

                                 Source: Congressional Budget Office and author's calculations.

In the projections that assume no excess health care cost growth, projected non-interest spending is 20.0 percent of GDP, less than 1.0 percentage point above its current level. That hardly seems like the sort of crisis that need to bother people 25 years ahead of time. In the case where per capita health care costs fell to their OECD average non-interest spending is 17.2 percent of GDP, considerably less than current spending.



Private Equity at Work: PE Firms Are Busy Making Hay While the Sun Shines Print
Written by Eileen Appelbaum   
Wednesday, 09 July 2014 13:49

Driven by the strong bull market in stocks and facilitated by low interest rates, private equity firms have been heeding the advice of Apollo Global Management head Leon Black to sell everything that isn’t nailed down. It was slow going for PE exits in 2009-2012 and many funds were stuck holding mature investments in their portfolios far longer than their preferred three to five years. But exit activity finally picked up in the second quarter of 2013 as PE firms that needed to divest portfolio companies took advantage of a rising stock market to sell these companies and return capital to investors.



House Republicans Ignore Unemployment to Keep Inflation Low Print
Written by Dean Baker   
Wednesday, 09 July 2014 08:16

Remember when Treasury Secretary Hank Paulson, Fed Chair Ben Bernanke, and Timothy Geithner, then President of the N.Y. Fed, were running around yelling that the world was about to end? Yeah, that was back in the fall of 2008 when Lehman went under and this trio demanded that Congress immediately cough up $700 billion to bail out the banks or the economy would collapse.

Of course Congress coughed up the dough, but the economy tanked anyhow, albeit probably not as badly if there was no bailout. Anyhow, six years later the economy is still operating at a level of output that is more than 5 percent below its potential, leaving 7 million people needlessly unemployed.

This is important background, because most people might think that the Fed’s failure to stem the growth of the housing bubble, whose inevitable crash sank the economy, was the biggest problem in Fed policy in recent years. After all, tens of millions of people are paying an enormous price for this failure.

But the House Republicans have other ideas. They seem to think the big problem is inflation. Therefore they are proposing the “Federal Reserve Accountability Act.” One of the major items in the Act is a requirement that the Fed follow a Taylor Rule in setting its monetary policy. As specified in the bill, the Fed would be required to set the federal funds rate at a level determined by the gap between potential GDP and actual GDP and the gap between the current inflation rate and the 2.0 percent target inflation rate. The law is intended to sharply limit the Fed’s discretion in adjusting monetary policy to the state of the economy.

There are both technical problems and substantive problems with this approach. On the technical side, the Act doesn’t give guidance as to what the Fed should do when the Act’s formula implies a negative interest rate, as would have been the case at least in 2009 and 2010 when the economy was operating at more than 10 percent below its potential.

The other major technical problem is that potential GDP is poorly measured as evidenced both the large differences between estimates from the OECD, the International Monetary Fund (I.M.F.), and the Congressional Budget Office (CBO). It’s not uncommon for these estimates to be 2-3 percentage points apart. For example, the I.M.F. currently puts the U.S. economy at 3.2 percentage points below potential, while CBO puts the shortfall at more than 5 percent of potential output.

There are also frequent and substantial revisions to potential GDP. CBO’s latest estimate of potential GDP for 2014 is almost 5 percent less than was projected back in 2008, before the downturn. This may reflect actual changes in the economy or it may just be CBO’s perceptions have changed. Applying a Taylor rule based on mis-measured potential GDP can have serious consequences. For example in the late 1990s, the economy proved that its potential output was far larger than CBO and other forecasters had recognized.

If the Fed had followed a Taylor Rule based on the wrong estimates of potential GDP it likely would have choked off growth and prevented the boom and low unemployment of that period. This was the only period since the early 1970s when workers at the middle and bottom of the wage ladder shared in the gains of economic growth.



Labor Market Policy Research Reports, June 21 – July 7 Print
Written by Ben Wolcott   
Monday, 07 July 2014 13:11

The following reports on labor market policy were recently released:



Data Flash: Strong Job Growth Continues in June Print
Written by Dean Baker   
Thursday, 03 July 2014 07:39

The economy added 288,000 jobs in June, making it the fifth consecutive month in which the economy added over 200,000 jobs. This is the longest stretch of 200,000 plus job growth since before the recession. The job gains were broadly based. Retail was the biggest gainer, adding 40,200 jobs, with professional and technical services adding 30,100 jobs. Manufacturing added 17,000 jobs for the second month in a row.

The news was also positive in the household survey with the unemployment rate falling to 6.1 percent, a new low for the recovery. This was due to people entering the labor force and finding jobs; the employment-to-population ratio rose to 59.0 percent. This is a new high for the recovery, but still 4.0 percentage points below its pre-recession level. Another piece of positive news is that the percentage of people who are unemployed because they voluntarily quit their jobs rose to 9.0 percent, the highest since the collapse of Lehman. This is a sign of growing confidence in the labor market.

CEPR News June 2014 Print
Written by Dawn Lobell   
Wednesday, 02 July 2014 15:16

The following newsletter highlights CEPR's latest research, publications, events and much more.

CEPR on Women and Unions
Just in time for the June 23rd White House Summit on Working Families, CEPR released a new report that explores the role unions play in addressing the challenges facing working women and families in balancing their work and family responsibilities. The paper,  “Women, Working Families, and Unions” by CEPR Research Associate Janelle Jones, CEPR Senior Economist John Schmitt and CEPR Director of Domestic Policy Nicole Woo, looks at trends in unionization for women; the impact of unions on wages, benefits and access to family and medical leave; and the role of unions in addressing work-life balance issues.

As Nicole noted, “There are few other interventions known to improve the prospects for better pay, benefits and workplace flexibility as much as unions do.  Anyone who cares about the well-being of women workers and working families should also care about unions”.

Nicole wrote this piece on the report for The Hill, as well as a blog post for Girl w/ Pen! titled “Unions: A Way for Feminism to Overcome Its ‘Class Problem’”  that wasreposted in the CEPR Blog. She also participated in several events surrounding the White House summit, including a conference on June 22nd called Working Families Speak Up!  that was sponsored by a broad coalition of labor unions and worker organizations. Here is Nicole at a press conference held the day of the summit, sponsored by Good Jobs Nation:



By the time Hillary Clinton leaves the White House, China's economy could be 50 percent larger than the US economy Print
Written by Ben Wolcott   
Wednesday, 02 July 2014 14:35

The World Bank’s updated estimates of GDP based on purchasing power parity (PPP) show a sharp upward revision to the numbers for China. As a result of these revisions, the Chinese economy is now larger than the U.S. economy by this measure. 

While people are more used to seeing GDP measured at exchange rate values, PPP rates attempt to correct for the fact that some goods and services cost different amounts of money in different countries. In principle, GDP based on PPP is assessing GDP if all goods and services sold for the same prices in all countries.



2014 Job Creation Faster in States that Raised the Minimum Wage Print
Written by Ben Wolcott   
Monday, 30 June 2014 14:21

The experience of the 13 states that increased their minimum wage on January 1st of this year might provide some guidance for what to expect here in Washington, DC when the city-wide minimum wage increases to $9.50 on July 1.

At the beginning of 2014, 13 states increased their minimum wage. Of these 13 states, four passed legislation raising their minimum wage (Connecticut, New Jersey, New York, and Rhode Island). In the other nine, their minimum wage automatically increased in line with inflation at the beginning of the year (Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont, and Washington state).



Private Equity at Work: Too Much of a Good Thing? Print
Written by Eileen Appelbaum   
Thursday, 26 June 2014 08:57

The run-up in the stock market over the last two years has been good to private equity funds. The U.S. stock market has more than doubled from its 2009 lows, and the Dow and S&P 500 were both in record territory on Friday. High valuations commanded by publicly traded companies have enabled private equity firms at last to exit many of the ‘mature’ investments in companies acquired at heady prices in the 2005 -2007 boom years. Apollo CEO Leon Black told participants at a Milken Institute conference in April that the rising stock market has created “a fabulous environment to be selling.” Apollo, he noted, sold about $13 billion in assets since the beginning of 2013. “We’re selling everything that’s not nailed down,” he told the audience.



Vacation as a Job Creator Print
Written by Ben Wolcott   
Wednesday, 25 June 2014 09:33

Basic economic logic predicts that an increase in the productivity of American workers should lead to some reduction in work time, the logic being that workers would take some of the benefits of higher income in the form of more leisure. Despite substantial productivity growth over the last four decades, time-use studies show the opposite trend, average hours worked in a year have actually risen somewhat over this period. It is worth noting that the United States is very much an outlier in this respect. Average hours worked have declined sharply in other wealthy countries over this period, with workers in countries like the Netherlands and Germany now putting in 20 percent fewer hours than workers in the United States.



Labor Market Policy Research Reports, June 14 – June 20 Print
Written by Ben Wolcott   
Friday, 20 June 2014 14:58

The following reports on labor market policy were recently released:



Unions: A Way for Feminism to Overcome Its “Class Problem” Print
Written by Nicole Woo   
Thursday, 19 June 2014 11:06

The Nation sparked a robust discussion last week with its incisive online conversation, Does Feminism Have a Class Problem?, featuring moderator Kathleen Geier, Demos’ Heather McGhee, the Center for American Progress’ Judith Warner, and economist Nancy Folbre.

They addressed the “Lean In” phenomenon, articulating how and why Sheryl Sandberg’s focus on self-improvement – rather than structural barriers and collective action to overcome them – angered quite a few feminists on the left.

While women of different economic backgrounds face many different realities, they also share similar work-life balance struggles. In that vein, the discussants argue that expanding family-friendly workplace policies – which would improve the lives of working women up and down the economic ladder – could help bridge the feminist class divide.



When Will It Pay to Take Family and Medical Leave? Print
Written by Helene Jorgensen   
Thursday, 19 June 2014 00:00

What does the United States have in common with the countries of Liberia, Sierra Leone, Swaziland, Samoa, and Papua New Guinea? Not much, other than being the only six countries in the world that do not mandate paid maternity leave. In fact, the Unites States does not provide for paid leave to employees who become sick with a serious illness either, nor to parents to care for a sick child or adult children tending to an ailing parent.



PRIVATE EQUITY AT WORK: For Red Lobster’s Workers, It’s out of the Frying Pan and into the Fire Print
Written by Eileen Appelbaum   
Wednesday, 18 June 2014 08:42

A nasty fight is brewing between Darden Restaurants, Inc.’s management team and hedge fund shareholders Starboard Value LP and Barington Capital Group LP over Darden’s sale of its Red Lobster chain to private equity firm Golden Gate Capital. Same store sales at Red Lobster have been declining, raising pressing questions about what to do to reinvigorate the chain which, with 706 locations in the US and Canada, accounts for 30 percent of Darden’s sales revenue. Unfortunately, the dispute between Darden’s management and its activist shareholders is not about the best way to turn the restaurant chain around, but centers instead on disagreement over the best use of financial engineering to maximize shareholder value.



Questions for Janet Yellen's June 18 Press Conference Print
Written by Nicole Woo   
Monday, 16 June 2014 10:46
With the U.S. Senate confirming three Federal Reserve Board governors since last month, following three resignations this year, there will be a new mix of voices at the Fed's Open Market Committee meeting this week.

Last week, the Brookings Institution released Janet Yellen's Dashboard, featuring charts illustrating several of the "most important measures of the economy's vigor" -- for example, that the unemployment rate remains above, while the inflation rate remains below, the Fed's targets.


Labor Market Policy Research Reports, June 6 – June 13 Print
Written by Ben Wolcott   
Friday, 13 June 2014 11:53

The following reports on labor market policy were recently released:



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